As of 1st October 2017, debt recovery and collections in both the commercial and consumer world is going to see a big change with the introduction of the debt recovery Pre-Action Protocol (‘PAP’).
There has been a previous pre-action protocol, introduced in 2014, which was in many ways accepted as a sensible approach to collection of all debts.
The PAP set for introduction on the 1st October on the other hand, affects debt collectors in many different ways. Despite being written for both consumer and commercial debts, there is a bias towards the individual rather than businesses.
The PAP applies to any business, from sole traders to public bodies, claiming payment from an individual. The new wording doesn’t specify that a partnership is part of this body of individuals. Does that mean partnerships are excluded? This remains to be seen.
The protocol is intended to allow debtors a fair opportunity to raise queries within a protected time frame. The Ministry of Justice suggests the PAP is to compliment any other regulatory regime which the creditor is currently subject to.
The essence of the incoming protocol is to encourage parties to communicate at a very early stage, exchanging sufficient information to help clarify when there are issues in dispute (no different to the previous PAP). Where they do differ, is the aim of the 2017 version is to try and avoid court proceedings, possibly using reasonable repayment plans or considering alternative dispute resolution procedures to resolve issues.
The 2017 PAP concentrates on procedure prior to litigation, dictating how and what path the creditor should follow in anticipation of litigation. Specifically, it details what the creditor is required to do i.e. sending a detailed letter of claim to the debtor, containing the following information:
The amount of debt (with interest) where charges are continuing from an oral agreement, including who made the agreement, what was agreed and when it was agreed.
- If the debt arises from a written agreement the creditor must detail the date of that agreement, the parties to the agreement, while enclosing a copy and stating that a copy can be requested from the creditor.
- Statement of account for the debt including the amount of interest and any other charges imposed since the debt was incurred.
- Details of how the debt can be paid and what the debtor can do to discuss payment options.
- Enclosing an information sheet and reply form found at Annex 1 of the Protocol.
- Enclosing a financial statement for the debtor to complete, an example of which can be found at Annex 2 of the Protocol.
The procedure after the ‘letter before action’ has been sent would be the following:
- The customer would use the reply form enclosed with the letter to respond.
- If the customer indicates that it is seeking legal advice, the creditor must allow the customer reasonable time to do so. The parties should exchange and disclose documents as early as possible, i.e. within 30 days of the request.
- If the parties cannot come to an agreement about repayment they should consider using ADR or a without prejudice meeting.
- If there is no response or no agreement after 30 days and all reasonable negotiations have been exhausted then the creditor is at liberty to issue court proceedings. However, the creditor must be sure they have complied with the above before contemplating proceedings and give a further ’14 day’ letter before action advising of their intention to issue proceedings.
- The creditor cannot issue proceedings for at least 30 days from the date of the letter and the court will expect the parties to have completed and complied with the protocol. If the matter goes to litigation then the court will consider any non-compliance with the protocol and the successful creditor who has not complied with the protocol could be penalised on costs.
- If the customer responds to the letter claim but an agreement is not reached, the creditor can commence court proceedings but should give the customer at least a further 14 days notice of intention to do so unless action is required.
What does all this mean to you?
The PAP is coming and all commercial creditors will have to comply with it. But, it will only apply to individuals and sole traders - not companies limited by their liability or public bodies.
It applies to all qualifying debts outstanding and overdue which are potentially being pursued in contemplation of litigation.
But what if the credit manager isn’t considering litigation at the early stage? Does the PAP still have to be complied with?
If litigation is not considered at the early stages of collections then credit managers do have options (set out below). Our advice comes with the caveat that “if you are considering litigation, then you will have to comply with the PAP at some stage of the collections process – it can’t/shouldn’t be avoided”.
The choices for credit managers could be as follows:
- Ignore the PAP: This is not recommended, as the consequences would be paying costs for both sides and potentially restarting the case (if allowed).
- Incorporate the PAP for all Cases: You could incorporate the PAP for all cases that are passed to your agents for collection. This would have the effect of:
(a) Extending the collections period by 30 days for debt.
(b) Identify and separate Individuals from those Limited entities, i.e. those caught by the PAP and those which are not. If individuals and sole traders can be identified by you at the instructions stage then separate them for inclusion in the PAP procedure and exclude non-qualifying contracts. At least the non-qualifying debts can follow the current collections regime.
(c) If unable to identify and separate out PAP qualifying cases, or it causes too much additional work, it may be beneficial to delay the incorporation of the PAP and simply adopt a collections process by you or your agent which does not threaten litigation i.e. no PAP required. In our view, this non-threatening method of collection will derive quicker payment from most and will allow the credit manager to collect debt which may otherwise have been delayed by the PAP.
The adoption of procedure “(c)” is that the credit manager can choose a third party for collections and derive any benefits a third party might bring. Further, the credit manager may outsource responsibility for identifying whether a customer is a qualifying debtor or not and allow the third party to pursue the non-qualifying customer as before and only pursue the qualifying customer when litigation is pending, i.e. only go down the PAP route when you know it’s necessary.
The advantages: the credit manager can employ a third party which has its own benefits of increased collections rates and avoid the need for compliance with the PAP.
The disadvantages: the PAP is inevitable and cannot be avoided for all qualifying debts. A 30-day period has to be observed somewhere in the collections process and the option we are recommending could defer some collections by 30 days.